When you’re running a business, it’s easy to get caught up in the day to day operations. However, if you want to plan for the future, it’s important to take a step back and spend time analyzing financial reports. While we’ve covered how to use a balance sheet, our small business accountants in Raleigh wanted to take an opportunity to now break down what a cash flow statement is and why they’re important to your business’s success.
The cash flow statement is a financial report that covers all the incoming and outgoing cash in your business during a set period. Outgoing cash includes payroll, purchasing inventory, rent, and buying equipment, while your incoming cash can include money made from sales, selling equipment you don’t need, accounts receivable, and even money from a business loan that you’ve got set for expansion.
Not only does it show how much cash is flowing in and out of your business, the statement shows where it’s going. This statement which shows if you have enough cash on hand to remain solvent, combined with your balance sheet, which shows the worth of your business, are key in determining the health of your business.
Once you know how much cash (or fluid income, such as accounts receivable) is coming into your business and how much is outgoing, you can use this information in a variety of ways.
It’s important to note that even if you have more cash going out than coming in, this may not be a bad thing, while seeing positive cash may not mean success.
Let’s look at these two examples:
Let’s break down what the three main financial statements are:
The income statement shows your revenue and expenses – how much is going out and how much is coming in, and what your profit is after expenses. The balance sheet shows your value as a whole after subtracting liabilities from assets. Your cash flow shows how much money is coming in and going out and your cash on hand.
When you take time to analyze all three financial statements, you can get a comprehensive look at the financial health of your company.
Creating a cash flow statement for your business is not too complex, as you’re simply entering in the components of your business that add or reduce cash.
If you aren’t comfortable with generating your financial statements, or you simply don’t have the time to do them, professional support can help. With accurate financial statements, you can have the information you need to grow your business and increase your profits.
Schedule a consultation today for your small business accounting at 919-420-0092 or fill out our online contact form to learn more.